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Production externalities and two-way distortion in principal-multi-agent problems
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Lockwood, Ben (1999) Production externalities and two-way distortion in principal-multi-agent problems. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.527).
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
This paper studies an otherwise standard principal-agent problem with hidden information, but whether there are positive production externalities between agents: the output of any agent depends positively on the effort expended by the other agents. It is shown that the optimal contract for the principal exhibits two-way distortion: the effort of any agent is oversupplied (relative to the first-best) when his marginal cost effort is low, and undersupplied his marginal cost of effort is high. This pattern of distortion cannot otherwise arise in optimal single- or multi-agent incentive contracts, unless there are countervailing incentives. However, unlike the countervailing incentives case, the pattern of distortion is robust to the precise form of the externality.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Externalities (Economics), Production (Economic theory), Information asymmetry, Incentives in industry | ||||
Series Name: | Warwick economic research papers | ||||
Publisher: | University of Warwick, Department of Economics | ||||
Place of Publication: | Coventry | ||||
Official Date: | April 1999 | ||||
Dates: |
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Number: | No.527 | ||||
Number of Pages: | 30 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) | ||||
Description: | First version, August 1997; this version, April 1999 |
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